Life, post acquisition

What to consider in your startup job offer

Every week someone asks me for advice about a startup job offer. I have no idea why people reach out to me about this. I’m not an expert on job negotiation by any means; but I have done a fair amount of hiring and deal making as an entrepreneur.

This post relays the main advice that I typically share to friends considering their startup offer. Hopefully I can use this post to direct my job-hunting network and save myself some time typing this advice over and over again. 🙂

First of all, your offer will not make you rich

Congrats on receiving your job offer!

No doubt you’ve done some good things to earn this new role. That said, let me rain on your parade a bit: your startup job offer will probably not make you rich. In fact, it will probably make you poorer, vs. taking a job at a big company.

The mistake that a lot of people make in reviewing their job offer is trying to analyze how their equity is going to turn them into a multi-millionaire. But the reality is that 92% of startups will fail. And when your startup fails, you will fail along with it.

Yes, there are certainly cases where people who have joined the right companies early have become fabulously wealthy; however these stories are the exception and not the norm.

Even when you do join a startup that gets acquired, you are awarded common stock, which is a form of equity that gets paid last. In many cases there is very little money left in the equity pool after the investors, and sometimes the founders, are paid out first. Such are the harsh rules of preference.

So if you’re likely not going to get rich from joining a startup, then why join? Well, there are many good reasons to join a startup.

You will learn more, and faster. I have worked at some pretty awesome large tech companies in my career, but these jobs don’t compare when it comes to the acquisition of new skills and knowledge you will enjoy in your startup role. Startup jobs are freaking hard, but at the same time your soul will be at existential peace; in startups you actually realize the full potential of your own greatness and push yourself like never before. It’s truly exhilarating.

Startup people are just cooler. Are you a little weird or maybe a bit offensive? No problem. You are about to join a pirate ship where everyone else is a bit off as well, but executes like a mother. Startup culture varies a lot based on the company, but when you find the right fit, it will truly be a situation where you will come to work to hang out with friends every day. And these friends may stick with you for decades as you explore new business ideas together.

There’s no such thing as really failing. This last point is particularly relevant to startup roles in Silicon Valley. If you join a startup that doesn’t work out — no big deal. People around here understand that startups fail all the time and that is normal. You’ll only get points for taking the risk. At least in this current environment, there is always another role or project waiting for you.

So think really carefully about why you want to take your startup role. I know, it’s hard to abstract away the vision of becoming filthy rich if your lottery ticket hits, but rationally try to understand what you would at the very least least get out of the experience even if your company were to fail.

How do I comp my offer?

Alright, so now that you’ve accepted the fact that your startup role will be more about learning than about becoming rich, how do you figure out how much salary and equity is fair?

A few obvious resources come to mind:

Quora – There is a ton of hugely useful information on this site to help you understand your role, how much people normally earn in this role, and what insiders actually think about the company you’ll be joining.

Wealthfront Startup Salary Comparison Tool – Wealthfront, a robo-investor startup, put together a pretty solid survey of startup salaries and equity. It has an interactive tool to drill down on your role and even considers salary based on region. It’s not perfect, but a decent baseline. [AUTHOR’S NOTE: Ha, on the day I publish this article, Wealthfront decides to retire this tool.]

Glassdoor, PayScale, Others – There are other sites that collect information about salaries, equity, and employee sentiment. It’s nice directional data, but generally I’m not a huge fan.

Talk to people who work(ed) at the company – Go on LinkedIn and try to see whether you know people who work at the startup you’re joining, or have worked there and have since left. Take these folks out for a beer and try to gather details.

Let’s put aside this research-driven approach for a moment. There is another way to think about your compensation: try to understand what VALUE you would bring to the startup.

Is there a unique skill or set of connections that you can bring to the startup, which the startup would not be able to find in anyone else? Think really hard about this. If you can bring something very special to the table, then you may be able to successfully argue for an offer that is way beyond what is standard.

Here’s a thought experiment: if I were starting a new company, and I thought that by hiring you I would be guaranteed to get to a $1 billion valuation by having you on my team — then what is hiring you worth to me? If I were in this situation, I may actually straight up give you 50% ownership, $500 million in value — if I 100% thought you could help make my company huge.

Talk to your startup founders and make a case about why you are a unique contributor. See whether that can be a starting point for your compensation talks.

Another tip: put yourself in the shoes of the CEO (you’ll most likely be negotiating with a CEO if it’s an early-stage startup) who is hiring you. What is the CEO thinking about when she’s making you an offer?

I want the offer to be fair– She’s wants the offer to be fair with regard to what she believes is fair across the industry, but more importantly, what would be considered fair within her company. It would be a bad situation if a really senior engineer heard that she’s getting way less equity/compensation than a junior engineer that just joined.

I want to the offer to be low as possible, but still exciting to you – The offer has to be large enough to get entice you to join, but the CEO also wants to preserve her option pool and not blow the entire allocation of employee stock on one new hire. The CEO wants you to feel invested to stick around until an acquisition or IPO, which will take years.

I need you to join – This is an extremely important point. The CEO made you an offer because she really really wants you to join the company. Really. Before making an offer to you, the CEO, her team, and possibly her board have all had a chance to meet with you, take you out to dinner, and discuss a strategy to get you to accept the offer. Many people have put in serious effort to try to court you. When I was extending job offers in my own company, I was always sweating bullets during the time I made the offer and when the candidate got back to me with a response. I only made offers to people whom I desperately wanted on my team.

Know that you have a TON of leverage in negotiating your offer. It’s likely that the entire company very much wants you to accept and may go to pretty drastic lengths to make sure you sign with them.

What are the terms I should care about?

There are a zillion terms you could potentially negotiate as part of your startup offer. But in general, I think that there are four really important terms that your offer letter should clearly define, in writing:

1. What percent of the company will I own, fully diluted?

OK, so this first one isn’t exactly a term, but it’s an important question to ask. You should expect to get a clear answer about this in an early-stage company (‘early stage’ is defined as Pre-Money, Seed Stage, or possibly Series A).

If you’re dealing with a shady founder or hiring manager, sometimes they will try to trick you by telling you the amount of shares you would be receiving — but not clarifying how much equity those shares represent in the company. They might say something like, “we’re going to give you 100,000 shares!” So that’s 100,000 shares…of what? Are there twenty million shares outstanding? One hundred million? If they aren’t being forthright about how much equity your shares represent, it’s a red flag. To me that signals you can’t trust these people, and you may want to walk away.

Make sure you are clarifying what your percent ownership would be, fully diluted. Another trick that some startups use against naive employees is representing ownership based on some smaller pool of shares, like just common shares in the company, vs. common + preferred shares. I know, this is all confusing stuff, but it’s out of the scope of this post to go into the full technical details of the various classes of shares.

The big takeaway is to get in writing:

How many shares you are receiving

What percent ownership those shares represent, fully diluted

2. What is my vesting schedule?

This one should be relatively straightforward: the standard vesting schedule is 4-years with a 1-year cliff. What does this mean?

4 years: this just means that it will take you four years to own the shares that have been granted to you. For example, if you accept a startup offer that grants you 100,000 shares:

After Year 1: you will own 25% of your shares, or 25,000 shares

After Year 2: you will own 50% of your shares, or 50,000 shares

After Year 3: you will own 75% of your shares, or 75,000 shares

After Year 4: you will own 100% of your shares, or 100,000 shares

1-year cliff: This means that you will not own any shares in your vesting schedule until you have worked one year at the startup. After that, your shares will typically vest on a monthly basis. But if you are fired or leave before one year at the company–you will have no shares vested and will walk away with nothing.

So why does this 4 year vesting with 1-year cliff make sense? Well, it’s important for two reasons:

If you suck then the company can fire you within a year and not lose any of its equity to a bad employee.

It’s a generally fair way to keep employees incentivized to stay and work hard at a company, since they gain more ownership in the company over time.

If your startup is trying to push an offer to you that that has a vesting schedule longer than 4 years, or even worse — a cliff that is longer than 1 year — I would be very suspicious and would probably walk away.

3. Accelerated Vesting

This advice applies only to stock options, which I assume you’ll be receiving.

This is a really hard term to negotiate, but it’s worth the effort. Accelerated vesting refers to the idea that if a specific event (or series of events) happens to your company, some or all of your shares will suddenly vest fully.

The most aggressive term you can ask for is single-trigger acceleration. Usually this refers to the idea that if your startup gets acquired or IPOs (both of these events are considered ‘change of control’), then your shares will suddenly vest. If you get single-trigger acceleration, usually something between 25% to 100% of your unvested shares will vest immediately.

Ask for this term, but expect to not get it.

The reason why it’s hard to get acceleration is that if the company gets acquired for a ton of money and your shares fully vest, then what’s to stop you as the employee from quitting immediately, laughing your way to the bank? The company (and the acquirer) would want you to stick around and continue to work hard and vest whatever shares you have left.

If single-trigger acceleration isn’t possible, then ask for double-trigger acceleration. Again, this is a term that is still hard to get. Usually double-trigger refers to the notion that some or all of your shares will immediately vest if the company gets acquired/IPOs — and you also get fired.

In my view, double-trigger is the best protection for both the company and the employee. For the company, if it goes through an acquisition or IPOs, there is still an incentive for the employee to stick around to cash in whatever remaining shares to vest. But for the employee, there is also protection in that if the company decides to fire the employee post-acquisition, there is a penalty that the company has to pay in accelerating the employee’s shares.

Don’t expect to get single or double-trigger acceleration in your startup offer unless you are being considered for a VP or C-level position at a startup. But I recommend fighting for it anyway.

4. Early Exercise and 83(b) Election

I’m not a tax guy, so I’ll try to keep this section as simple as possible. Basically, the lesson here is: to early exercise your stock options and file the right form with the IRS within 30 days. Definitely ask for these two things in your startup offer.

Perhaps the best way to illustrate why this is important is an example:

Let’s pretend you join an early-stage startup and they give you 1,000,000 shares of stock options. Because these are stock options, you have the opportunity to buy your shares early, which is called early exercising. And the price per share in the early days is ridiculously cheap, only $0.001 per share (this is an example, share prices will vary), so early exercising your shares would cost you 1,000,000 x $0.001 = $1,000!

Then let’s say that a few years later your startup gets acquired and is priced at $1 per share. Your shares have gone from being worth $1,000 initially to $1,000,000! The gain, which is $990,000 will now be taxed as long-term capital gains if you had early exercised (and filed the right form — we’ll get to that in a moment). The long-term capital gains rate today is about 20% at the federal level. State taxes may apply as well, depending on where you live.

So you would owe $990,000 x 20% = $198,000 in taxes to the government. And then the rest is yours.

Let’s say that you did not early exercise your stock options. Same scenario, you received 1,000,000 shares of stock options, initially worth $1,000 that later become worth $1,000,000. Since you didn’t early exercise, now you have to pay taxes on your earnings as income, instead of capital gains. The top-line federal income tax rate is about 40%.

So you would owe $1,000,000 x 40% = $400,000 in taxes to the government.

What a huge difference! Early exercising in this scenario would have saved you about $200K in taxes owed.

But early exercising alone is not enough. When you early exercise, you also have to file an 83(b) election within 30 days of exercising your shares. The 83(b) election is a simple form to notify the IRS that you’ve exercised your stock options. If you miss that 30-day window, then you are screwed and will have to pay income taxes vs. long-term capital gains if your company gets acquired or IPOs. It’s amazing how many people forget to file this stupid form on time and then later get destroyed by taxes.

The other important thing to note: you have to hold your early exercised shares for at least one year before qualifying for long-term capital gains. So for example, if you early exercise, file your 83(b), and your company gets an awesome acquisition six months later, then you will pay income taxes no matter what since you held your shares for less than a year. But in a similar scenario, if you early exercise, file your 83(b), and your company gets an awesome acquisition anytime after one year from your exercise, then you will be able to qualify for long-term capital gains.

If this all sounds confusing, it’s because taxes are really confusing. But the big takeaway here is that you should ask to early exercise and file an 83(b) election as part of your startup offer. That is, if you can afford to early exercise.

If you are joining a later-stage startup, early exercising may not make as much sense. Mainly because it will probably be really expensive for you to exercise. For example, let’s say you join a startup which is really late stage, and they give you 100,000 shares priced at $2 per share in order to early exercise. I would think really hard about whether you are willing to pony up $200,000 in order to take advantage of hypothetical long-term capital gains on a hypothetical future exit.

TL;DR: Taxes are bitch. If you can early exercise, do it, and it might save you a ton of money.

The most important thing: do you trust the founders?

There are so many other terms you could negotiate in your startup job offer, but here is the most important question you must answer: do you think the founders will take care of their people?

Of all the employees at a startup, the founders have the most to gain from the company’s success. The journey of a startup is long and difficult, and along the way there are many temptations for the founders to liquidate their company to become personally rich–while screwing over their employees.

What makes startup life so exciting is that the experience trains you to trust your gut to make the right decisions for yourself and the company. The first test in trusting your gut in this journey will be whether you think the founders will take care of you.

If you do find good founders who will look after you, then you’re in for a very satisfying ride. In this case, go ahead and accept that offer!